One of the best known novels that came out of the German depression of the early thirties was Hans Fallada’s Kleiner mann – was nun?. It is deeply depressing in a very lyrical Germanic way and it is not exactly surprising that Fallada’s own life had many problems, personal and political. He survived being blacklisted by the Nazis, incarceration in an asylum, drink and drug problems but, being taken up by the new Communist literary establishment in East Germany after the war, finished him off. He died of a morphine overdose in 1948.
It is really the title of his novel that has survived in so many people’s memory and, almost inevitably, it returns as one surveys the gloomy economic prospect of Germany of today.
An article in the Economist, entitled “If not now, when?”, points out that all the indicators are in Germany’s favour:
“IN THEORY, Germany should be booming by now. Sizzling global economic growth in 2004, and more of the same expected for 2005, has raised demand for its exports, a boon to its large manufacturing sector. The European Central Bank (ECB) has kept interest rates in the euro area at an easy 2% for 22 months, and looks set to keep doing so well into 2005. Fiscal policy is also expansionary: the government’s budget deficit has breached the Maastricht treaty’s 3%-of-GDP limit for three years running, and by all accounts will do so again this year. Yet for all this, for the past four years Germany has struggled to produce GDP growth of even 1% a year.”Not only that, but the future looks bleak as a semi-annual report by a consortium of six think-tanks (and if that is not Germanic, I don’t know what is) says. The prediction for growth this year is slashed from 1.5 per cent to 0.7 per cent, that is almost non-existent.
“More worryingly, the report argues that the German economy is not stuck in a particularly vicious cyclical slowdown. Rather, its structural problems, particularly the highly regulated labour market, have reduced trend growth (the average growth rate of the economy) to a meagre 1.1%, in contrast to roughly 2% for the rest of the euro area, and about 3% for the United States. Unless these trends reverse, Europe’s largest economy could eventually wind up as its economic backwater.” The most stagnant area is unemployment, which is now running at 12 per cent. This leaves the economy depressed and more reliant on export than it ought to be.
The German government has acknowledged that the problems are structural and has tried to introduce reforms as well as lower corporation tax. Critic say that the reforms do not go far enough and the cut in corporation tax will not affect many companies.
Meanwhile the “hungry” East Europeans are threatening the German worker inside the country and the whole economy from outside. Investment is moving inexorably east. If the EU regulatory regime looks like slowing down the new members, then money will move further east still.
The impending election means that politicians are juggling for advantageous position, many of them moving further left, to get the support of the unions, though that position is disastrous from an economic point of view. And the EU does not help.
“From the point of view of a German politician, alas, all policy choices must look bad. Membership in the euro area leaves the country monetarily at the mercy of the ECB, which seems determined to maintain a hard line on inflation, and thus to resist calls for an interest-rate cut. Germany’s already-large budget deficits cannot be sustained indefinitely at such low rates of economic growth, much less increased. And deeper structural reforms will not be popular with the voters who lose benefits or job protection—particularly since such reforms may well make unemployment worse in the short term, as firms shed the workers they previously found it difficult to fire.”As Hans Fallada said in 1934: Little man – what now?